Miners in the fast lane on electric vehicle surge

In car factories and showrooms, and on highways and streets around the world, a quiet revolution is gathering speed.

In ever-growing numbers, motorists in the world's biggest auto markets are getting behind the wheels of electric vehicles.

Experts from UBS believe that worldwide sales of electric vehicles in 2017 will be about 1 million for the first time. And they predict that in 2025, a massive 16.5 million electric vehicles will be sold - equal to almost one in every six new cars sold.

But in this country the take-up has not been as fast as some countries. Electric vehicle manufacturer Tesla opened the doors of its first Australian showroom in 2014, simultaneously offering Australian motorists performance and a stylish way to avoid petrol bowsers. All of course, if you could afford the hefty price tag.

A few short years on and there are about 1100 Tesla pure electric vehicles registered in Australia, according to a recent report from the federal Department of the Environment and Energy. These Teslas are among 4000 electric and plug-in hybrids registered across Australia, according to the Department.

It's only a tiny fraction of Australia's overall vehicle fleet, but it's part of the wave of change sweeping across the globe.

But if you're searching for evidence in Australia of the rise of electric vehicles, there's a much better place to look than on our highways, freeways and city streets. A good place to start, in this country at least, is the sharemarket.

There are a vast number of ASX-listed companies involved in lithium, a key ingredient in the manufacture of electric vehicle batteries.

And lithium companies have been among the best performed stocks on the sharemarket this year, with stocks in Orocobre and Galaxy Resources more than double their price of just a few months ago.

Both companies have market capitalisations of more than $1.4 billion and are producing the stuff and selling it, while experts say that some others in this space are at the beginning of what could be a very, very long road to developing a productive asset, if they get there.

So how will the rise of electric vehicles affect the commodity landscape? And is it too late for interested investors to get on board, and invest in Australian companies mining commodities used in EV batteries?

Glencore, which describes itself as one of the world's largest diversified natural resources companies, gave a snapshot of the "disruptive force" that electric vehicles will be in a recent presentation to investors.

The company commissioned CRU to conduct research into what 30 million sales of EVs by 2030 would mean for metal demand "across the supply chain, from generation and grid infrastructure through to storage, charging and vehicles".

The report found that the metal required to support 30 million EV sales in 2030 was about 4.1 million tonnes of copper (equal to 18 per cent of 2016 supply), about 1.1 million tonnes of nickel (or 56 per cent of 2016 supply) and 314,000 tonnes of cobalt (about 314 per cent of 2016 supply).

While Glencore is already a significant producer of copper, nickel and cobalt, there are plenty of other miners, of varying sizes, hoping to get in to the driver's seat of the electric vehicle express.

"There are now, I think, over 300 listed lithium plays across Australia and North America. It's over 100 in Australia," said Lachlan Shaw, global commodity strategist with UBS.

"Now of that the number of producing businesses, that is businesses that are producing lithium today and making cash, would be probably less than 10. And then, of the next cohort, that are businesses with a project that has been appropriately explored, defined, put through a feasibility study and is shovel ready, (there) may be half-a-dozen," he said.

Which means there are many others with a fair way to go.

Lithium stocks have already been a hit with investors for some time, but a number became jet propelled in 2017.

Pilbara Minerals, for instance, closed at 50 cents on January 3, the first trading day of 2017, and was as low as 32 cents in April. On the last day of trading in 2017, it closed at $1.115, and is now a $1.83 billion company.

Kidman Resources, which has one of the biggest lithium projects in the world at Mount Holland in Western Australia, closed at 60 cents on the first day of trading in 2017, and was as low as 35 cents in April. In the months since its stock price has boomed, and it closed on the last trading day in 2017 at $1.88. It now has a $658 million market capitalisation.

Kidman's managing director, Martin Donohue, told the International Mining and Resources Conference held in Melbourne recently that Chinese companies had been busy striking deals with lithium companies to secure lithium supply.

"It's very hard to find a lithium developer or producer that hasn't signed some kind of an off-take with the Chinese converters, or even further upstream," he said.

"What's that meant, in some ways it's almost like an arm's race as we get into this electric vehicle market," he said.

As Chinese companies chase lithium supplies, and Australian investors chase lithium stocks, how much room, if any, is left for the stock prices of companies in lithium and other electric vehicle commodities to climb higher?

Asked if it's too late for Australian investors to get into the electric vehicle theme, Mr Shaw pondered the question carefully, then responded: "Yes, and no."

He added: "In many ways, some of the easy money on punting hopefuls, that may have been done. But I think the real money, in terms of actually investing in businesses that have assets in production, and that have options to grow production either at their existing asset, or with new assets, I think there are still good options out there."

While investors "need to do their homework", shrewd ones would be able to find opportunities, he said.

"When I sit back and I look at the potential growth in electric vehicle penetration globally, on a 5-10 year view, and I look at what that means for the materials required to make the batteries that will be needed, that there's a huge opportunity in lithium markets. And I think for me right now, the best way to play that is to be investing in businesses that have current production today, that are making cash, but businesses which have options to grow in the future.

"Because then you're talking about a real business that is running well today, positioned well today with the opportunity to grow and be part of this emergence on a five to 10 year view. And I think that's when the opportunity gets a lot more tangible, and the risk becomes a lot more reasonable and the potential for an ongoing sustainable business that has growth and good cash flow and returns to owners, that sort of prospect emerges," he said.

Among the lithium stocks UBS likes Galaxy and Orocobre.

"Both those businesses have assets that are producing today, that are making positive cash flows. Both of those businesses have growth options ahead of them.

"There's a degree of risk there, to be sure, but it's a lot less risky in my view, than a much earlier stage proposition. Those businesses have pathways ahead of them," he said.

Another way for investors to tackle the EV theme is to consider other commodities involved in EV batteries, he said.

"Also important in today's batteries is graphite, and we like Syrah Resources. They have an enormous resource project in Mozambique, they have just commenced shipping first production, it's very low cost, they have huge optionality at that project.

"It's possible for Syrah to meet the world's expanding graphite demand by just adding extra production to their Balama project. And so they have a great market position," he said.

Among other companies UBS likes in the EV thematic includes the nickel and cobalt producer Independence Group.

Adrian Prendergast, senior resources analyst at Morgans, believes the EV theme will continue to be a "hot area of investment" for Australian investors in 2018.

"Certainly, the space has had an extremely good run, speaking generally. For those people who are only just seeking to enter this space now, you'd have to be much more selective. Whereas in 2017 you really could just play a basket of exposures in this space and really enjoy that real big mark-up in equity value re-ratings we've had.

"I think 2018 will be more a story of carefully going through this space and picking out which of those stories actually have the potential to be commercialised, and really, there'll be a limited number, versus the large list of aspirants trying to enter the space," he said.